4.4.1. Initial recognition
The future operational carbon liability represents a future carbon obligation that the reporting entity is committing to, because of its ownership of the asset. This represents the future emissions that will take place because of the operation of the asset and are necessary for the asset to fulfil its expected functions. The future operational carbon liability represents the theoretical cost of the future carbon emission of the asset as it is delivering its expected economic value.
For example, this represent the amount of carbon that will be emitted by a real estate asset in order to allow to heat it or cool it over its remaining expected useful life
Under this model, as soon as the reporting recognize the asset on its GAAP balance sheet it needs to reflect a future operational carbon liability. This liability is based on the assumption of
- a perpetual use of the asset,
- a defined useful life consistent with the GAAP accounting used by the reporting entity. In that case, the value of the emission shall not be discounted, and the underlying assumption for the useful life of the asset needs to be explicitly disclosed.
A Future operational carbon liability is recognized when:
- An Embedded Carbon Asset is created in the balance sheet.
- This asset to which the Embedded Carbon Asset is attached is expected to generate carbon emission to deliver its future economic benefit.
The future operational carbon liability is always recognized on the carbon balance sheet, and balanced by an equivalent counter booking in the entity’s carbon P&L.
The immediate booking of the loss in the reporting entity carbon P&L reflects the commitment made by the entity at the time when the asset is recognized to spend the carbon. While the actual spending will only take place in the future, the commitment already exist at the time of recognition of the asset
A real estate company that would build and deliver a new building, is at the same time committing the future users of that building to spend the carbon its need to operate the building. It is that commitment that is the base for the Future Operational carbon liability.
4.4.2 Initial Measurement
Future operational Liability is initially measured in accordance with § Future operational Liability §5.2.3 section.
4.4.3. Subsequent Measurements
Future operational liability is subsequently measured in accordance with Future operational Liability §5.2.4 section.
A Future Operational Carbon Liability is derecognized if:
(i) the asset to which it related is derecognized under GAAP as a result of a transferer to another entity which will report it as an asset under its applicable GAAP,
(ii) the asset reaches the end of its useful life, and is not expected to produce any further economic value.
The derecognition of a Future Carbon Obligation Liability triggers a counter booking on the Carbon P&L of the reporting entity
For example in real estate the sale of an appartment building to an institutional investor which will report it in its own balance sheet would trigger the derecognition of the Future Operational Carbon liability under (i) above, however the same appartement being sold to a family would not trigger the derecognition, as the family is not reporting the asset under GAAP. In the latter case the reporting entity would carry the liability up to the end of the expected useful life of the asset.